Popular Science Monthly/Volume 49/May 1896/The Development of the Monetary Problem

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THE consideration of every problem concerning the welfare of humanity compels, first, the understanding of what constitutes that welfare. That is, recognition must be had of the factors that forward civilization, which is the condition that permits the attainment by each individual of the highest harmonious, physical, mental, and moral development of which he is capable. To the highest physical life it is necessary that the body be nourished by a regular and sufficient supply of food; that it be protected by appropriate clothing and properly housed; that it receive the exercise and the care and attendance that contribute to the maintenance of the bodily functions. To attain the highest mental life it is necessary that knowledge of that which mankind has said and done shall be brought to the mind of each individual, to the extent that such knowledge will the more thoroughly adapt him to his environment and enable him to most effectively react upon that environment. In the agencies that lead to these ends—that is, in the production and distribution of food and clothing; in the erection and furnishing of houses; in the processes of manufacture that result in the various articles of personal use; in the production of newspapers, books, paintings, and statues; in the composition and rendition of music, and in all the other functions that contribute to bodily and mental welfare and gratification—are employed the efforts of by far the greater number of the adult male population and of a considerable number of the female population of the civilized world. As this effort is so interwoven that it is almost if not quite literally true that the work of all contributes to the welfare of each, and the work of each contributes to the welfare of all, it is manifest that there must be some means whereby the portion of welfare accruing to each individual from the totality of effort may be measured out to him, and as human effort has become the more closely interwoven has this means changed in becoming the more adapted to its purpose.

In prehistoric time, the man whose home was a cave, whose clothing was the untanned skins of beasts, and whose food their flesh and berries and fruit, knew not money and needed not money—the satisfaction of his wants resulted immediately and directly from his own exertion. And so likewise throughout the untold years during which he learned to cook with fire made by the spark of flint and to fashion the flint into spear heads, he needed not of the effort of others. But through the ages, as his developing brain led his hands to other uses, as he learned to mold and harden the clay into pots, to fashion and wield the oar, to weave the bands of willow into mat and basket, it became impossible for any one man to accomplish for himself all that man had learned to do. There was division of labor, first perhaps between a man and the women of his household, but in time the efforts of the members of any one family alone became impossible to supply its wants. There was a further division of labor, and the exchange of the results of effort is the more marked as the division of labor increases. When one man traded pots of clay to another for flesh obtained in the chase, the efforts of the one in digging, molding, and baking were exchanged for the efforts of the other in hunting, killing, and delivering the game. This was barter and barter, or the exchange of effort as embodied in desired commodities, without the intervention of other commodities, endured over much of the earth for centuries, complicated by the customs of slavery, feudalism, and absolutism. But as man learned in a greater number of ways to produce a greater variety of articles, barter became inadequate to effect their exchange. A weaver might want a bow and a dozen arrows, and a maker of bows and arrows might want a bolt of cloth; but the weaver, perceiving that he had to work six days to make the cloth, while six bows and as many dozen arrows might be made in that time, of material no more difficult to obtain and by a man no more skillful than himself, would properly refuse to exchange the cloth for fewer than that number of bows and arrows—that is, a bolt of cloth would be worth six bows and six dozen arrows. If, however, the exchange were so made, the weaver would have five bows and five dozen arrows which he did not need. He, therefore, would not obtain the reward for his own use of his effort in producing the bolt of cloth until he had exchanged the five bows and five dozen arrows for articles that he could use. Consequently, if barter were persisted in, each purchaser would accumulate a number of articles of different kinds for which he had no need, and he might have no place wherein to store them. Each producer would be endeavoring to exchange articles made by every other producer, and so have his time absorbed that his efforts in production would be lessened. The process of exchange would be of inextricable confusion. If, however, there were some one commodity for which each producer would readily exchange his products at any time, so that, therefore, each person could at any time exchange this commodity for any other commodity that he might need, the process of exchange would be simplified. It is evident that such a commodity must occupy little space, so that it could be readily stored, that it must not be perishable, and that it must be so divisible that different portions of it might be exchanged for different commodities in proportion to their value—that is, in proportion to such quantity of the commodity as might be accepted by the seller for and yielded by the buyer to obtain the article exchanged. Such a commodity used for the convenience of exchange is money; and all peoples who at different places on the earth's surface at different times have step by step risen from barbarism through barter have made use of money. Different commodities at different places and with different peoples have served for this purpose—skins with one tribe, shells with another, beads with another, and even in our own country, within the last two hundred years, the leaves of the tobacco plant. But no other substances known to man have so completely possessed the attributes of permanence of form, durability, and divisibility as the metals; and therefore lead, tin, copper, silver, and gold have been very extensively used as money.

Another characteristic essential for a commodity used as money is its acceptability, not only among the persons of a particular locality, whose efforts are interchanged, but among the people of all localities whose efforts are interchanged. The shells accepted by the members of one tribe might not be acceptable as money by the members of another tribe among whom skins were used for that purpose. If the members of the tribe using shells as money wove mats and molded pots, which were acceptable for exchange for tools made by the tribe using skins as money, and the money of neither tribe were acceptable to members of the other, there would be direct barter of the tools of one tribe for the mats and pots of the other. But as barter between individuals of one locality results in confusion, so also does barter between individuals of different localities, and the confusion in the processes of exchange by barter becomes the more inextricable as an increasing number of people in an increasing number of localities produce an increasing number of articles acceptable for exchange among the different peoples of the different localities. With the extension of intercourse between tribe and tribe, race and race, has therefore increased the tendency toward the use as money of commodities acceptable as money over the more extended territory occupied by the peoples whose efforts were interchanged. With the increase of this tendency the use of metals as money increased. They have been found in nearly all parts of the earth, and because of their general acceptability—that is, because of a certain common estimation in which they have been held—they have attained to a degree uniformity of value, which has the more nearly approximated perfect uniformity of value as the use of metals as money has become restricted to the metals meeting in greatest degree the requirements of money, which are silver and gold. And as the common needs of similarly situated groups of people have resulted in the formation of the more or less coherent bodies known as states and nations, the use of gold and silver as money has the more extensively been sustained by coinage—that is, the weight and fineness, and therefore to a degree the value, of different portions of these metals have been evidenced by the stamp of the administrative bodies of states and nations, and this use of gold and silver has been enhanced by their exquisite luster.

As commodities were exchanged in larger volume, metals of the greatest value were coined. The extensions of intercourse between races incident to the conquests of Philip and Alexander were marked by the coinage of gold. At the time of the decemvirs, the Romans passed from barter to the use of copper coins; as their commerce increased, the southern settlements along the sea made use of silver, and, finally, after gold bullion had long been the medium of exchange in Eastern commerce, Julius Cæsar opened the mints to gold. After the submersion of the Roman Empire the coinage of gold was not resumed until the florin was issued at Florence in 1252—the extensive commerce initiated by the Crusades demanding a more valuable medium than silver.

The different weights, sizes, and shapes of coins made by different nations, the different units of value by which they have been measured, and the different languages in which their values have been expressed, have caused much confusion, as different tribes, races, and nations have passed beyond restricted intercourse between their own members to commercial intercourse one with the other, or rather, as individuals of particular tribes, races, and nations have undertaken commercial intercourse with individuals of other tribes, races, and nations. Hence the money-changers of antiquity, the remote forerunners of bankers who arrange international exchanges to-day. With the combination and recombination of tribes and races under governments, whose administration has extended over considerable areas, the monetary systems have become correspondingly fewer—the imperial coinage of the German Empire supplanted seventy different coinage systems of the combined states—and coins of the different nations have the more nearly approached uniformity in shape, weight, size, and value.

But even the precious metals, although they satisfy the requirements for money better than any other commodities, do not meet those requirements in perfection.

In the first place, the amount of silver and gold in existence at any one time is never in the same proportion to the volume and value of the exchanges of that time as it is to the volume and value of exchanges at other times—that is, the volume of gold and silver does not expand and contract in exact accord with the expansion and contraction of commerce. Nor is it conceivable that the rapidity of circulation of either gold or silver varies in exact ratio with the variations of trade. The growth of commerce, for example, that began in Europe during the thirteenth century, so far outstripped the increase in the supply of the precious metals that each of the petty states and principalities was in a continual fight with the others for the possession of a sufficient supply of gold and silver whereby the exchange of effort as evidenced by the exchange of commodities between its own subjects could be rewarded. The world's product of gold was nearly four times as great in 1850-'60 as during the preceding decade; it was about twenty-five per cent less in 1880-'90, and during the present decade promises to exceed that of 1880-'90 by one hundred per cent.

And the supply of neither metal increases in the same ratio as the other; therefore, that pursuit after a constant ratio between gold and silver which has continued to this day is vain as the cruise of the Flying Dutchman.

And as it is estimated that at the present time actual coin passes in less than ten per cent of the exchanges, it is significant that a medium of exchange has largely taken the place of coins. This medium consists of paper representatives of value.

And, again, the quantity even of gold necessary to effect any considerable exchange is of such weight that its transportation is a matter of inconvenience, and for any person or association of persons to keep safely on hand all the gold that might be amassed at any one time would necessitate expensive precaution. Obviously these inconveniences are avoided by the deposit of silver or gold coin or bullion in the charge of a person or persons responsible for its safe keeping, and for its transfer from the owner to another as he may direct. Hence banks of deposit and payment by check, the use as money of paper representatives of money. For if B is willing to accept the check of A upon banker C in the belief that he can obtain the money for which it calls upon presentation, why should not D accept the same check from B upon B's assurance that it is good?

If A, buying merchandise from B, says that he will have the money wherewith to pay for it when he has resold the merchandise, or at the end of a particular time, B may be willing to accept his written promise to pay; usually, however, with the stipulation that A surrender an additional sum as compensation to B for waiting for the payment. This sum is interest. And upon B's guarantee that the promise is good, D may be willing to accept the promise from B as payment for other merchandise. Or if B need the money in advance of the time specified in A's promise to pay, he may perhaps deliver the promise to D in return for the money. Or, as would be more likely, he would seek to obtain the money from banker C in exchange for the promise of A guaranteed by himself. It is obvious that should D or banker C pay to B the full amount of money specified in the promise of A, he would be dispossessed thereof from the time it was given to B until it was repaid by B—that is, he would have rendered a service without compensation. It is equally obvious that compensation would be obtained if a portion of the sum specified in the promise were withheld by C. This sum is the discount. Banker C, by making a practice of thus advancing money on such promises, may obtain a considerable revenue. Hence banks of discount.

There are banks which not only make money by discounting from the amount of deposits over and above what they estimate will be required for daily needs, but which issue promises to pay in the form of bank notes, the funds available for use in discounting being, therefore, increased. Hence banks of circulation.

he development of banks, therefore, has been from simple repositories of the commodity used as a medium of exchange into purveyors of the currency that is superseding coin, the providers of funds for commercial transactions, and the centers through which instruments of exchange are balanced.

Besides the checks and promissory notes issued by individuals, which have a limited circulation, and the notes issued by banks, which have a more extended circulation, many governments issue notes directly that circulate generally among their peoples. As, however, the precious metals are the only commodities generally accepted as money throughout the world, all promises to pay are based upon one or another of them, but the aggregate of value represented by these promises to pay is so great that their fulfillment at any one time in coin or bullion would be impossible, the ratio between the volume of exchanges effected by the use of paper representatives of money to the volume effected by coin or bullion itself being, as has been said, greater than nine to one.

This fact, that the total value called for by the paper representatives of value at any time in existence, although expressed in terms of the units of value originally designating coins, vastly exceeds the value of the metals as coined or held in bullion by the sources whence coins are issued, together with the fact that no man willingly and knowingly exchanges commodities for paper representatives of value without believing that he can obtain the worth called for by these representatives, leads to the perception that, after all, it is not the metals, however precious, but property of all kinds that is their basis, and that these paper representatives of value are succeeding coins in designating and measuring the value of the commodities for which they are exchanged. And as the value of commodities depends upon the efforts expended, under the law of supply and demand, in producing and delivering them at the place of need, the ultimate function of paper representatives of value is to measure and reward human effort.

By way of example, let it be supposed that a tailor sells a suit of clothes and receives in payment therefor a check for, say, fifty dollars. He deposits that check in a bank in the belief that he can obtain a definite worth for it in whatever commodities or services he may choose to invest it, and the bank likewise accepts and places it to his credit, in the belief in the ability of the signer and indorser to produce commodities or services of the value for which it calls. If the tailor buys a set of furniture and gives his check for fifty dollars therefor, what he has done has been to exchange the value of cloth as measured, cut, sewed, and trimmed into particular shape for timber, cut, joined, and varnished into a particular shape of what he deems an equal value. The value of the efforts of men expended in producing the clothes has been balanced against the value of the efforts of men expended in producing the furniture. If fifty dollars in coin were received for the clothes and given for the furniture, the effort expended in producing the clothes would be measured against the effort expended in producing the furniture, by the use of an intermediate commodity; if a check were received for the clothes and a check paid for the furniture, effort would be measured against effort by means of paper representatives of value through the agency of a bank. If the tailor, instead of purchasing furniture worth fifty dollars, purchases a number of articles aggregating fifty dollars in value, the result is the same. The efforts of men in producing the number of articles have been measured against the efforts of men in producing the suit of clothes, and this is the function performed by money in every exchange, whether great or small, and whether the money is coin or a paper representative of value. Effort as expressed by result is measured against other effort as expressed by other result.

The test of the efficiency of a paper representative of value, therefore, is the extent to which it can be exchanged for the value which it expresses. But as the value of a paper representative of value is expressed in terms that also express the value of coins, it is a measure of so much value as is represented by the coins, and a paper representative of value is at present almost universally considered as such only to the extent that it is the representative of coin. A certain amount of coin, or the bullion from which it is derived, has a definite and known value as coin or bullion, without qualification or condition, throughout civilization, but a piece of paper representing the value of that amount of coin or bullion considered simply as paper, whether covered by writing or impressed by an engraved block, is without intrinsic value. That is, for example, twenty-nine grammes, 448·025 grains, of fine gold, whether in bullion or coined into a hundred-franc piece, can readily be exchanged throughout Europe and almost as readily throughout America for an approximately similar amount of commodities; but a piece of paper known as a National Bank of Belgium one-hundred-franc note can be exchanged for commodities to this value only among peoples who feel confident that it can readily be exchanged again in return for commodities to the value of one hundred francs, and such peoples in great numbers do not exist outside the kingdom of Belgium, because other than the Belgian people are not generally familiar with the language in which the note is printed, and therefore do not understand the value of the units of value in which the note is expressed, and they are not sufficiently familiar with the Belgian banking system to know that the note is secure—that is, that twenty-nine grammes, 448·025 grains, of fine gold, can readily be obtained for it. The extent to which a paper representative of value, which in itself has no intrinsic value as a commodity, will circulate is therefore at present determined by the number of people who believe that it can readily be exchanged for coin or bullion to the value expressed by it. Essential to this belief are confidence in the honesty and ability of the issuer. Therefore, when a people among whom paper representatives of money of a particular issue have been freely circulating begin to lose confidence in their ability to readily exchange them for the coin for which they call, there arises a tendency to exchange commodities and services only for coin. As this tendency increases, as the lack of confidence in the paper grows, there is soon reached a time when the exchange of commodities and services is greatly diminished, because there is only sufficient coin in existence to effect a small fraction of the normal value of exchanges.

But, as measures of value in the last analysis are measures of human effort as determined by its results, it is obvious that, were every paper representative of value so secured that the holder thereof might be certain that at any time he could obtain in exchange for it the result of human effort to the measure of the value called for by it, in a form acceptable to him, such paper representatives of value would obtain free and general circulation among all people believing in their security. The more extended the territory throughout which, and the greater the number of people among whom, such a currency would circulate, the less would be the need over such territory for the use of bullion or coin as money or the basis of paper representatives of value. And the monetary systems of the peoples among whom commerce has obtained the greatest development are gradually reaching such a basis. The paper representatives of value, which at first were direct representatives of coin, are tending more and more to become the representatives of value, as expressed by the result of effort, without the intervention of coin, and in the furtherance of this tendency banks perform an essential part. In the evolution of the social organism banks become the ganglia through which the action of the different parts of the organism is measured and made reciprocal.

And as the use of bank notes, checks, bills of exchange, government notes, and other paper representatives of value is most marked among the peoples through whose exertions commerce has attained its highest development, so also the members of a highly civilized community most concerned in commerce make greater use of these paper representatives of value than other members of such a community. In any large city the transactions of the principal manufacturers and merchants are chiefly conducted by means of checks, bills, and notes, while clerks, artisans, and laborers, who are principally paid in coin or the direct representatives of coin, secure needed commodities by the immediate exchange of coin or the direct representatives of coin for them. The development of representatives of value not based upon coin to the extent of rendering them generally acceptable for exchange among clerks, artisans, and laborers would still further decrease the dependence upon coin or bullion as money or the basis of money, leaving coin and bullion freer for use in effecting exchanges between peoples of different nationalities who are so separated by language, habits, or institutions that commercial intercourse between them must be upon a bullion basis.


One of the incidents of the recent deep-sea dredging expedition of the Prince of Monaco most fruitful in scientific results was the capture of a sperm whale. It occurring to the prince that the food collections in the animal's stomach might include specimens of creatures still unknown, the ship was held near the whale till it died. In its convulsions it threw up a mass of fragments of very curious cephalopods, which were beginning to float away and be scattered and lost to science, when the ship's screw was reversed to create a counter current, under the advantage of which specimens of two entirely new species, quite different from any hitherto known, were recovered. The body of one was covered with scales, and was more than ninety centimetres long. The other had a crown of tentacles armed with suckers bearing claws like those of the larger birds of prey.